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Edited Transcript of FUV.OQ earnings conference call or presentation 14-Aug-19 9:00pm GMT

Q2 2019 Arcimoto Inc Earnings Call

Aug 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Arcimoto Inc earnings conference call or presentation Wednesday, August 14, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark D. Frohnmayer

Arcimoto, Inc. - Founder, President, CEO & Chairman

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Conference Call Participants

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* Greg Falesnik

MZ Group North America - MD

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Presentation

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Greg Falesnik, MZ Group North America - MD [1]

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Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Arcimoto Second Quarter 2019 Earnings Webcast. (Operator Instructions) This conference is being recorded today, August 14, 2019, and the earnings press release accompanying this webcast was issued at the close of market today.

At this time, I'll turn the call over to Mark Frohnmayer, CEO of Arcimoto. Mark, the floor is yours.

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Mark D. Frohnmayer, Arcimoto, Inc. - Founder, President, CEO & Chairman [2]

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Thank you, Greg, and good afternoon, everybody. It is a beautiful day here in Eugene, Oregon and happy to be having this call. I'm going to start out by giving for those who have -- are recent to the story, I'm going to do a brief outline of Arcimoto as a company, then play a short factory tour video for those of you who have not actually been out on site, talk about our remaining compliance milestones to get into delivery of vehicles and then a bit about the road ahead.

So Arcimoto's mission is to catalyze the shift to a sustainable transportation system. We are a mission-driven company trying to solve this problem on the screen. We are, right now, on a strong upward climb of a truly inconvenient exponential growth curve in carbon in the atmosphere and transportation is a big piece of that problem. And the particular piece of transportation that we're going after is everyday mobility. So looking at the disconnect between the footprint of vehicles on the road today and the way that we actually use those vehicles, which is typically 1 or 2 at a time. You can think of Arcimoto as kind of a classic disruption story, not in the Silicon Valley everything is disruptive sense, but more in the traditional Clayton Christensen sense of a disruptive innovation is one that meets the utility threshold for a market at a much lower cost.

And so if you think of Arcimoto versus -- the Arcimoto vision versus electric car vision, we're looking at shaving 2/3 of the weight, 3/4 of the battery, a big piece of the footprint in order to hit a price point that lands where a toy would cost or a used car or a golf cart rather than the average cost of the new car. And that really is key to the disruption thesis of the company.

So the first 8 years of the company were all about finding utility threshold and finding the product that would actually meet that utility threshold at that disruptive weight, cost and efficiency level. The 8th generation is the foundation of the Arcimoto platform.

So the big takeaway for us from a venture perspective is that the vehicle market is huge. If you look at 70 million cars or 132 million motorcycles produced every year, parcel delivery, food delivery going from a $30 billion a year market to a $365 billion market in the next 10 years and looking at all these various slices of the vehicle market and addressing them with a single new vehicle platform.

So the Arcimoto platform starts with the Fun Utility Vehicle. We're a consuming-facing brand. We started from a consumer quest for a sustainable transportation solution, so we think it's important to lead with a consumer product. It carries 2 passengers very comfortably. I'm sort of at 6 foot 4, our sizing dummy for the vehicle. And to be able to fit 2 large guys comfortably in a vehicle that can park 3 to a space is really a significant differentiator of the Arcimoto from basically every other product out on the road that we have seen.

This picture is the feature we call Rockstar Parking Comes Standard. So not only is a vehicle incredibly maneuverable through urban environments; has plenty of everyday range; can be -- can include full enclosure doors, storage, and so on; but it's also exceptionally easy to park, and that has implications both in terms of reducing driver frustration as well as really direct cost benefits for the delivery version of the vehicle.

So the second version of the product family that we announced -- we actually announced 2 additional products on the Arcimoto platform earlier this year. One was the Deliverator and this is one we're going directly after last-mile delivery, the sort of shifting pattern in the delivery market space where companies like Amazon are going from 2-day delivery to 1-day delivery to just-in-time delivery. Those new models of delivery call for new types of vehicles. And the Deliverator packs an incredible amount of storage space onto a very small vehicle platform. So the benefits of maneuverability of the Arcimoto and the benefits of parkability of the Arcimoto, both have direct implication on the bottom line for vehicle delivery services.

And then finally, we introduced the Rapid Responder, which takes the benefits of the Arcimoto platform and applies them to security, law enforcement and emergency response. So both the Deliverator and the Rapid Responder are vehicles that we have prototyped. They will follow the Fun Utility Vehicle in terms of the development process. So once we have finalized and are actually delivering the Fun Utility Vehicle to customers, later on this year, then we will begin the finalization process for those 2 products. One of the real advantages of the Arcimoto platform is that basically about 90% -- we're estimating 90% plus of the parts from all of those 3 platform vehicles will be shared. Meaning that we're expecting a much shorter development cycle on the Rapid Responder and on the Deliverator than on the market-entry product, [which is] the Fun Utility Vehicle.

So our initial market entry plan is based around experience rental. So you can think of sort of 3 different generations of vehicle go-to-market strategies, the traditional model being, of course, franchise dealerships for cars, where a franchisee buys vehicles from a manufacturer and then sells them to customers. Tesla and others have said, well, that's not well setup for electric vehicles, that leaves -- that takes a lot of margin out of the middle, and so opened up direct-to-consumer retail stores. That, of course, carries with it significant operational and capital investment overhead.

We believe that the rental experience model is sort of the ultimate win-win, where instead of franchising vehicle sales, we are franchising rentals as a company like Hertz would, but unlike Hertz, we own our own vehicle -- unique vehicle product and manufacturing process in the market. And so our franchisees will purchase vehicles and rent them to customers, we'll take franchise fee and then a little bit off of the top line forever forward. And that is going to be our key driver for the in-market vehicle experience. So instead of you coming into a store and taking a test drive, you rent a vehicle for half a day or for a full day and then by the end of that day, we are convinced that you will have come up with lots of reasons why you should have an Arcimoto in your own driveway. We've announced several rental partnerships in this last -- in quarter 2, we announced a partnership in Costa Rica and a partnership with GoCars in San Francisco. So for those of you who are familiar with the San Francisco market, the GoCars are little 3-wheeled tour vehicles. They have about 80 vehicles in their fleet and they're going to replace about half of those with Arcimotos.

So in one of the key technology capitals of the world, we'll have a high degree of visibility coming very soon out of the gates after we actually launch the product.

We are -- have spent the last -- almost last couple of years since our initial public offering, provisioning our manufacturing plant and preparing for production, finalizing the product. So the Arcimoto manufacturing plant really embodies our production model. I think of this somewhat like a microchip. We have functional areas within the factory footprint and those areas are designed to be replicated in order to build to scale.

So I'm going to play you guys a video. This is for those who have not had a chance to actually see the factory for themselves and I'm going to just fire it up right now.

(presentation)

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Mark D. Frohnmayer, Arcimoto, Inc. - Founder, President, CEO & Chairman [3]

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So for any of you folks, for whom that video came through a little choppy, you can actually see the full thing, we just posted it to our YouTube channel. And the significance of that last vehicle rolling offline, this is actually the very first Evergreen Edition Fun Utility Vehicle to hit the road. So we are not in "full production yet" but we are building production vehicles. So we have a few last little steps of compliance to work through, but we have -- the line is fully up and running building up inventory in anticipation of the completion of compliance.

So last month in a letter to all of our stakeholders, I laid out our sort of 3 final hurdles, the brake system testing, which had been delayed largely due to weather; lighting compliance testing and then finally, the efforts to finalize the seatbelts and the frame. So brake system testing is complete. In terms of lighting compliance, we have only a single position left that has yet to pass the 4 key photometry, visibility, colorimetry and effective projected luminous lens area tests. That are the -- those are the front turn signals. We now have 1 candidate turn signal at the lab and 1 more that we'll get there at the end of this week. We have a final test on the headlights, the out-of-focus test, which is next week. And then we have mechanical testing or pass-through certification for all of the lighting about 70% complete and we are anticipating that may be completed as soon as the end of next week. And then finally, when it comes to the seatbelts and frame, we have worked collaboratively with our seatbelt manufacturer to really do a deep dive on Arcimoto's new 3+2 seatbelt system. So we've gone through several revs of belts with our seatbelt manufacturer. We have validated those belts and anchorages as of this morning and we are doing a final full vehicle confirmatory sled test that is on the docket for August 26, that's a week from Monday. So those tests -- sleds will go out on Saturday and make the trek across country.

In terms of funding, Arcimoto continues to attract financing on terms that we believe are favorable to the company and favorable to our stakeholders. And we expect to access additional financing on substantially similar terms.

So key goals for the rest of this year. Obviously, get into production and deliver hundreds of Evergreen Edition Fun Utility Vehicles. We'll be -- our engineering team will complete the Rapid Responder and Deliverator. We will open key destination rental locations, so those -- starting on the West Coast, primarily in California from the Bay Area on down and then in other sunny locations around the country and around the world. We'll roll out our product delivery and service networks. We are charging well down the path on the development of vehicle options and upgrades, things like air conditioning, soft doors, both soft half doors and soft full side doors. At the same time, that -- once we are in production at initial Evergreen volumes, we're going to be preparing for mass production for the following years.

So again, step 1 is deliver. We are anticipating that we will be delivering and starting production this quarter. We actually have begun producing vehicles and are building up inventory now. That white vehicle was the very first Evergreen edition Fun Utility Vehicle. And then, within 12 to 18 months, the plan is to ramp up to a rate of production of 200 units per week, which is the equivalent of 10,000 units per year. And as of the end of the quarter -- there's an error on this slide, this is actually at the end of quarter 2, we had 4,128 pre-orders and then at an average sales price anticipated $17,000, we look at that as $70 million in anticipated revenue.

So in quarter 2, we actually also began really telling the Arcimoto story to a larger global audience. We -- I was invited to speak at the Singularity University Summit in Thailand, just got back from Boston at Canaccord Genuity's conference. And talking about the Arcimoto platform vision as a solution for the global transportation problem, we saw great reception in Southeast Asia, in Thailand, in China, in Taiwan, in Korea, and we are anticipating that the factory model that we have built, we see sort of a 2-step scale-up process. One is to take those basic functional units of the factory -- of the AMP design, very capital-efficient, flexible manufacturing program and replicate those functional units within our own global headquarters. And then ultimately is to take sort of Arcimoto in a box and replicate it all over the planet.

As we look out over the out-years, this is really just to show you in very broad strokes where our heads are at in terms of what we see as the long-term potential for the product family. And what that looks like both in terms of the potential for revenue generation as well as battery purchasing power, which is really our -- one of our key cost reduction objectives over the coming years.

So a little note about the sector. We are an electric vehicle company. We are building a platform that is ideally suited to last-mile delivery, to autonomous daily transport. We -- to vacation rental, to vehicle sharing opportunities. We really see the Arcimoto platform as being at the confluence of pretty much every major trend in mobility today and that as we look out at the rest of the market, we see significant amounts of investment going on in this sector at reasonable valuations. And that the transition from fully into a production and delivery company is when we would have the opportunity to begin tapping into those larger pools.

So that is all you have -- all I have for my planned remarks and then I would like at this point to open it up to Q&A. So if you have a question, there is a Q&A interface, and you can ask a question and I will do my best to answer. So here we go.

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Questions and Answers

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Mark D. Frohnmayer, Arcimoto, Inc. - Founder, President, CEO & Chairman [1]

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So first is, can Arcimoto give any information as to its efforts to standardize the definition of autocycle in the U.S. or the various states so that the Arcimoto qualify as one and not be held to stricter motorcycle regulations?

So there is -- there's been an effort to standardize -- to put what is called the autocycle, which is the 3-wheeled vehicle that has -- that drives like a car, as a special class in a lot of states laws. That was work that was done largely by Elio Motors and then AAMVA, which is the American Association of Motor Vehicle Administrators, sort of came out with broad definitions for what an autocycle is. We actually helped in that process in like 2012 or 2013. And so we have been -- the particulars of the Arcimoto as it is a handlebar-steered vehicle, it doesn't fall into those autocycle categories. So we have been working on a state-by-state basis, focusing on sort of our key early states first. We -- over the course of this year, we've gone from on the order of 14 states that don't require a motorcycle license to drive the Arcimoto up to 19. They're only now about 5 states, I believe, that require a helmet for all ages to use the Arcimoto. So we've actually made a significant progress so far and we've seen warm reception from legislators who have -- see one, that the vehicle is incredibly easy and intuitive to operate. It takes -- the learning curve is basically 0 and that the vehicle solves really a pressing need for state carbon reduction goals. So we've had receptive audiences where we're going, and we expect it as we roll out into the large market. We're going to continue that effort, particularly once we have production vehicles on the road. I should also add that we are leveraging our community of both interested potential customers as well as pre-order customers to write their legislators and help with those lobbying pushes and we expect to do more of that in the future.

So next, do you think electric scooters such as Spin and Lime in urban areas are going to erode the bottom end of the potential market since they have "already provided a sustainable shift in resources?" If not, why not? If so, what are your plans to combat them?

We really see actually that those -- the micro mobility and the mini mobility, which is the category that Arcimoto would fall into, are actually complementary categories. So the push for electric scooters and electric bicycles exposes a much wider audience to the -- really the fun factor of -- and the fun and clean aspects of electric transportation. But the Arcimoto can do so much more than a last-mile scooter. We really look at the Arcimoto as sort of the last 10-mile solution or the last 30-mile solution. It's the vehicle that can get you all over your community in comfort, goes on all the roads, yet still maintains the benefits of small form transportation.

So next question. Where will all the vehicles for the recently announced foreign partnerships be built? And what priority will they get over existing reservations for people not on the East Coast?

So this is, I believe, in reference to the announcement of the deal with Costa Rica. The way that we look at this is that we have always planned to have in-market experience for potential future customers. So as we go into market, we are going to sort of have 1 channel of vehicles that goes off to our pre-order list and then those -- for those who remember our business plan before, we were going to do experience rental, we were going to do retail stores. And so this is -- that has sort of always been the plan. We're anticipating that eventually probably about 30% of our vehicles will go to in-market rental operations and fleet operations, with the balance going to consumer vehicles. And so I would expect that it will probably be a little bit less than that for the initial ramp just because we have so much pent-up demand from our very, very patient pre-order customers. Thank you all for bearing with us through this vehicle finalization process. We are confident that the changes we have made and the continued refinement will have made it worth the wait.

So then with the first production vehicle scheduled to hit the road soon, explain the maintenance and warranty plans for prospective buyers.

So the Arcimoto is going to come with a 3-year, 36,000-mile warranty. We're planning on doing service in a variety of ways. In markets where we have rental outlets, we will -- our rental outlets some will double as service centers. We're also talking to major in-market service providers, so those who do basic automotive service can service basically all of the ware items on the Arcimoto. And then we also plan to have a mobile service option, so basically service in your driveway.

How much cash is needed to get to the sustainable production target of 200 per week? And how are you going to fund it?

So we're looking at a variety of tools for the next stages of growth of the company. And primarily, we're looking at basically an inventory line of credit that will fund parts of that production ramp. But basically, I think the key here is that we are planning to stay at basically a relatively consistent volume once we hit a rate of around 100 a month. We're going to stay at a consistent production volume until we have the tools to really step up. And that's to the point of this slide on production, is just we're going to -- step 1 is deliver, get into market at low volume and then a major push to reduce costs and increase scale that will see a step function up, basically, we're anticipating middle to late next year.

So the question -- next question is, based on your pilot builds and subsequent teardowns, can you get to 200 vehicles per week in the Eugene factory? If not, what has to happen?

So we believe that our manufacturing line and the tools that we have in place can get to a 200 per week production volume in the facility that we have now. I'm anticipating that probably the major piece that we'll need to address in order to hit that number with our current facilities is going to be part storage. So the line is set up for it, the manufacturing equipment is set up for it, but currently we don't have the space for inventory, that is a work in progress. So the nice thing is where we're located, we actually have plenty of open space around us. We have a very large parking lot that we could put a tent up in or the like or build a structure that will fit. So we think we can do that where we're at. In order to hit the production volumes that we want to hit going forward, beyond that, of course, we'll need more space.

Next question is, is AC ready to go? Or can it be sold as an add-on later and plugged in by the consumer?

AC, we have our first air-conditioning prototype ready to go, but it is not ready to go as a for sale option yet. That is an area of active development and we're expecting to have that done in relatively short order. It probably won't be a consumer plug-in. It would be something that would be an add-on that would be done by a professional service -- one of our service providers.

Next question is, will the same seatbelt be used in the front and rear? Will both belts have pretensioners and load limiters?

So the same belts, we actually do a 3-point and a 2-point in the front and in the rear. There is no pretensioner and there is no load limiter, but the 3+2, it's sort of a -- this is a model actually that we borrowed from the BMW C1. It's an attempt to get closer to the functionality of a 4-point belt but using conventional seatbelts that are easy to get in and out of.

And the next question is when do you really expect to deliver your first vehicle?

We are expecting to deliver our first vehicles in this quarter. And so basically, if you look at the milestones ahead, it is possible we will be done with all vehicle testing within the next couple of weeks, and then there will be a -- quite a bit of additional documentation as those test reports come in and we fold them into all of our compliance certifications. But you can be assured that the team is really working at full, full steam to get vehicles out on the road to our customers. So we are very happy with the performance of the vehicle. We're very happy with what this process has brought us, and we understand really everyone champing at the bit. Believe me, nobody more than I to get the vehicles on the road and in the hands of our customers.

So next question is how do you plan to protect your position and value proposition, i.e., patents and barriers to entry?

This is a good question. So Arcimoto has a handful of key patents, 2 on the basic vehicle architecture. So the real innovation that we have been fighting for on the vehicle platform is how do you build a small footprint vehicle that feels like a much larger vehicle that carries 2 large adults very comfortably yet fits 3 to a space. And that is what our architecture patents are all about. It really is -- those are about how do you ballast a 3-wheel vehicle platform to make it stable on the road even though it is small and lightweight. We also have key patents in the drivetrain; a novel battery interconnect, which is a crimp-based interconnect. It has really nice properties, both mechanical and electrical properties that's applicable to higher power batteries. And we have a patent on our dual motor gearbox. I would say that in terms of what are our barriers to entry, so patents will certainly play a part of that story. I think first-to-market with a real micro mobility solution for the mass market, continued innovation in the space so that people who are shooting for where we were are not getting to where we are. And then a relentless focus on a pure electric solution that is a new brand, a new market opportunity, that is not weighed down by existing internal combustion engine products and branding, and so on.

Next question is do you have any other vehicle types in mind for the future?

Well, yes. Yes, we definitely do.

Next is when do you project Arcimoto the need to raise funds again and how much? Would that be a share offering through debt?

I actually -- this is, on the funding slide addresses, we continue to be able to attract financing on terms that we believe are favorable to the company and favorable to our stakeholders and you can see that in our most recent filing. And we actually expect to be able to access additional financing on substantially similar terms.

Next question is how long does it take to produce one vehicle?

We, during our round-robin vehicle assembly and disassembly process, we peaked at 3 vehicles a day. We are actually on a 1-vehicle per day production rate now and we expect that once we are in market, we will rapidly ramp up to 5 vehicles per day. And then by the time that we're actually producing at that 200 vehicles per week rate, that's basically 1 every 20 minutes.

Are you exploring -- next question is, will there be periodic updates on certification and testing? Or will we have to wait until November?

Well, if we are successful in releasing the vehicle this quarter, there's basically -- there's basically 1 more month left in the quarter and you will certainly see that announcement. This is something we have been building towards for a very long time and we are truly champing at the bit to get vehicles on the road into the market and you will know the moment that happens.

Are you exploring the possibility of using lithium silicon batteries with silicon anodes?

We are open to future battery technologies as they become cost effective and sold at scale in the marketplace. We are not actually -- we are not a battery cell manufacturer. We build our own battery modules out of cells. So I would say we are definitely open to the possibility of using the next chemistry du jour, whether it is a different anode-cathode construction or solid electrolyte or whatever. It's just really going to depend on when those new technologies are in production at scale and accessible to us through our partners.

Next question is what are Arcimoto's views on a merger buyout if the opportunity presented itself?

We are -- Arcimoto is a mission-driven company. Our mission is to catalyze the shift to a sustainable transported solution -- system. I can see with the right partner, the right acquisition partner, that we could accelerate that mission. But again, we would make that sort of a decision through that particular lens.

And then final question is, would it be up for international purpose -- purchase, U.K. based?

So our focus today is getting into market, on the road, here in the U.S. and then the moment we are through U.S. compliance, we're looking at European compliance next. So yes, and then, of course, we're looking also elsewhere in the world in terms of both market and then production.

The final question is, is the white vehicle you showed in the video one that is complete and will be provided to a customer?

So the vehicle is complete, but for the items that yet have to be finalized in terms of certification. So basically, the front turn signals and then there was actually 1 body panel part that is the hinge cover that was not in place in the photo on that vehicle, but otherwise it's a complete vehicle. That one will not be provided to a customer. That one is going to be an internal marketing vehicle for Arcimoto. That was -- but the customer vehicles are very close behind it on the production line. Some of our very first customer vehicles are in build right now and just simply awaiting that final certification for delivery.

So with that, thank you all for participating this afternoon. It's nice to have such a large crew on an August summer afternoon and evening. I would remind you all if -- to head over to our YouTube channel and check out that factory tour, if it was a little choppy coming through on the call, and thank you all for your support.